China: Improper Use Of Commercial Signs — Proposed Revisions To Article 5 Of The PRC Anti-Unfair Competition Law

On February 25, 2016, The State Counsel Legislative Affairs
Office ("SCLAO") released a draft amendment ("Draft
Amendment") of the PRC Anti-Unfair Competition Law
("AUCL") for comment by industry and other
stakeholders. Article 5 of the 1993 AUCL provides the basis
for claims against Business Operators for unfair trade practices
involving the misuse and misappropriation of trade dress,
enterprise names, and other commercial signs. The Draft
Amendment of the AUCL contains some interesting and encouraging
language, but could benefit from additional clarification and fine
tuning. Industry has until March 25, 2016 to submit comments
on the Draft Amendment to the AUCL, and numerous industry
organizations have been collecting comments for submission to SCLAO
over the last few weeks. Here are some highlights of proposed
changes to Article 5, and some of the open issues that will
hopefully be addressed before a final version of the revised AUCL
sees the light of day.

"Market Confusion" and "Commercial
Signs"

Article 5 prohibits business operators (which under the Draft
Amendment would include natural persons) from engaging in 4
enumerated "acts of market confusion" that involve the
use of "commercial signs". The Draft Amendment
defines market confusion as "misunderstanding by the general
public of product manufacturers, traders or a particular
relationship linked to product manufacturers or
traders." A commercial sign is understood as referring
to "a symbol that differentiates product manufacturers or
traders, including but not limited to the unique names of famous
products, packaging, trade dress, shape of goods, trademarks,
enterprises and group company names and abbreviations, trade names,
main parts of domain names, website names, webpages, personal
names, pen names, stage names, channel program and column names,
logos, etc."

Comment: The language of the Draft Amendment
does not address whether actual evidence of market confusion is
required to invoke Article 5 against a business operator, and
industry is hopeful that no such requirement is imposed going
forward. The 2007 Interpretation of the Supreme
People's Court on Certain Issues Concerning the Application of
the Law in the Trial of Civil Cases Involving Unfair
Competition ("2007 AUCL JI") provides that evidence
of actual market confusion is not required for trade dress
infringements under Article 5. Industry is pushing for this
approach to be retained, and for "market confusion" to be
addressed in practice similar to the way that "consumer
confusion" is handled in cases involving trademark
infringements under Article 57 of the Trademark Law.

The very broad list of protected commercial signs is indeed
encouraging, and it expands the scope of Article 5 into areas that
are not explicitly covered under the language of the current AUCL
(such as television channel programs, newspaper column names, and
webpage names). While this list appears intended to be
illustrative and not exhaustive, the addition of other signs to
this list may actually be difficult in practice unless the
Administrations for Industry and Commerce ("AICs") and
the People's Courts have additional guidance on the application
of Article 5 into new areas. Industry would thus prefer that
the list include the interior decorations of business premises and
the distinctive attire worn by a business operator's staff
(which are specifically addressed in the 2007 AUCL JI), and to also
indicate that the list is merely illustrative and not exhaustive,
and that any sign could fall into the purview of Article 5 if use
by a third party could lead to market confusion.

"Famous Commercial Signs"

The first of the 4 prohibited acts of market confusion is set
out in Article 5.1 in the Draft Amendment. This provision
prohibits the "unauthorized use of the famous commercial sign
of another, or using a commercial sign that is similar to the
famous commercial sign of another leading to market
confusion." This is a contemplated "catch-all"
provision that would arguably be the core of the amended version of
Article 5.

Comment: The most common concern voiced about
the proposed language of Article 5.1 relates to the term
"famous" ("Zhi
Ming/知名"). This term is often and
erroneously translated as "well-known", which is actually
a term of art for the wide protection afforded to certain
trademarks that meet a particularly high standard of fame in a
relevant market, and is the translation equivalent of the Chinese
term "Chi Ming/驰名" .

The standard for "well-known" trademarks is not what
is contemplated by the term "famous" in Article 5.
In practice, the AICs and the People's Courts have required
considerably less evidence of fame for bringing claims under
Article 5 of the AUCL than would be otherwise required for invoking
the protection of a well-known trademark under relevant provisions
of the Trademark Law. Article 1 of the 2007 AUCL JI defines
"famous" in the context of trade dress protection as
"certain market popularity within the territory of China and
are known by the relevant public." It is reasonable to
assume that continued reference to the term "famous" in
Article 5 of the Draft Amendment contemplates the same or a similar
standard as that articulated by the SPC in its earlier AUCL JI, and
adopted by the courts and the AICs in practice. Industry is
requesting that the revised AUCL retain a modest standard for
proving that a commercial sign is famous, and specifically indicate
that evidence of fame is only required in cases involving a
likelihood of confusion, and not in cases where a business operator
can produce actual evidence of confusion in the market. Come
what may, there is little doubt that the AICs and the courts could
benefit from additional clarity on the meaning and implication of
the term "famous commercial sign" in the language of a
revised Article 5, or in subsequent administrative measures and
judicial interpretations.

"Conspicuous and Confusing Use of Commercial
Signs"

The second of the 4 enumerated acts of market confusion is
addressed in Article 5.2 of the Draft Amendment. This
provision prohibits the "conspicuous use of one's own
commercial sign that is identical or similar to the famous
commercial sign of another that is misleading to the general public
and leads to market confusion."

Comment: The language of Article 5.2 of the
Draft Amendment is an important addition to the purview of Article
5, and could be very useful to business operators that seek to
address the misappropriation and use of trade names, trade name
acronyms, and other identifiers that are adopted and used as the
commercial signs of a local business operator. This provision could
also cover the conspicuous use of registered enterprise names in
commerce that incorporate trade names or other identifiers that are
the same or similar to those of business operators with prior use
and fame in the market, and that would not fall into the ambit of
Article 5.3 (discussed below).

The term "conspicuous use" ("Tu Chu Shi
Yong/突出使用") is also a term of
art, but one that continues to beg for clarification. This
term is perhaps most famously referenced in the 2002
Interpretations of the SPC of Several Issues Concerning the
Application of the Law to the Trial of Civil Disputes Involving
Trademarks ("2002 TM JI"). Article 1 of the
2002 TM JI provides that the conspicuous use of an enterprise trade
name that is the same or similar to a registered trademark for the
same or similar goods is an act of trademark infringement if it
could easily cause mistaken recognition by the relevant
public. The People's Courts have generally applied a
fairly flexible standard for determining when use is
"conspicuous" – one that focuses on whether
relevant consumers would notice use of the trade name on the goods
in question and thus potentially be deceived. Industry has
long wished for further clarification on the "conspicuous
use" standard in the context of the 2002 TM JI, and the fact
that this standard is being referenced in Article 5.2 of the Draft
Amendment makes need for further clarification all the more
acute.

The language of Article 5.2 in the Draft Amendment, as well as
the language of Articles 5.3 and 5.4 (discussed below), appear to
articulate a two-prong confusion standard that entails (1)
misleading the general public, and (2) leading to market confusion.
Market confusion is a defined term (see discussion above)
that implies a misunderstanding as to source or affiliation, but it
is unclear what is meant by "misleading to the general
public", and what additional evidence would have to be
mustered to meet this element of the apparent two-prong
standard. As Article 5 is focused on commercial signs that
differentiate product manufacturers or traders in the market, the
confusion standard should focus on the relevant market when gauging
likelihood of confusion. With this in mind, industry is
recommending that the confusion standard be defined as
"leading to a likelihood of confusion in the relevant
market," and that the application of this standard be aligned
with the "likelihood of confusion" standard in trademark
practice as mentioned above.

"Registered Enterprise Names"

The third of the 4 enumerated acts of market confusion is
addressed in Article 5.3 of the Draft Amendment. This
provision prohibits "using a registered trademark or
unregistered well-known trademark of another as the trade name in
its enterprise name that is misleading to the general public and
leads to market confusion."

Comment: This specific provision is
intended to bring the AUCL in line with Article 58 of the Trademark
Law, which provides that "cases involving the use of
another's registered trademark or registered well-known
trademark as a trade name in its enterprise name, where such use is
liable to mislead the public and constitutes unfair
competition" are to be handled under relevant provisions of
the AUCL.

Article 18 of the Draft Amendment sets out the possible
administrative fines for violations of Article 5. For Article
5.3, AICs are required to order business operators that engage in
the use of infringing enterprise names to change their names within
one month. If the business operator fails to do so, the AICs are to
issue a punishment decision and fine, and if it refuses to
change the name after issuance of a punishment decision, the
business operator will have its name changed by the AIC to a
placeholder number, and be put on the "abnormal business
operations" list. In serious circumstances, the AICs can
revoke the operator's business license.

Local AICs act as both the enterprise name registry and the
enforcers of Article 5 in the local market, and under the current
regime, they have very little guidance for the handling of disputes
involving conflicts between locally registered enterprise names and
registered trademarks. Because of this, many AICs have been
very reluctant to take strong measures against companies in their
jurisdictions that register and use enterprise names that contain
third party trademarks. Article 5.3 of the Draft Amendment
seeks to address this issue, and Article 18 provides a specific
timeline for the AICs to take action, and fairly clear guidance on
the handling of such cases. This is a welcome development for
a conflict of rights issue that has caused significant frustration
for brand owners in China, and one that is very much supported by
industry.

"Trade Names and Trade Name Abbreviations in Trademarks
and Domain Names"

The last of the 4 enumerated acts of market confusion is
addressed in Article 5.4 of the Draft Amendment. Article 5.4
prohibits business operators from "using a trade name or the
abbreviation of a trade name for a famous enterprise or group
company in its trademark or in the main part of its domain name
that is misleading to the general public and leads to market
confusion."

Comment: This provision is targeting a very
specific and common practice employed by business operators in
China – the practice of using third party trade names or
trade name acronyms as a trademark or as the distinctive part of a
domain name. While the acts contemplated under this provision
would arguably fall within the purview of Article 5.1 discussed
above, the drafters have opted to create a separate and specific
prohibition involving trademark and domain name use, most likely
because the AICs have traditionally been reluctant to handle such
cases in light of overlap and possible conflict with the trademark
law, and the dispute resolution policies governing certain
gTLDs. For example, in cases involving the misleading use of
a trade name in a trademark, the AICs (and the People's Courts
as well) have traditionally insisted that an aggrieved party
challenge the validity of the trademark in opposition or
invalidation proceedings, and to seek administrative recourse or an
injunction on use only after having successfully knocked the
trademark off the registry.

This provision would arguably allow for aggrieved business
operators to obtain administrative or civil injunctive relief for
acts that cause confusion in the market under a theory of unfair
competition while seeking to challenge the validity of a third
party trademark or domain name in a parallel proceeding.
While this provision could indeed prove helpful to aggrieved
business operators, there is no doubt that industry stakeholders,
as well as the AICs and People's Courts would benefit from
additional clarification as to how and when this provision can be
invoked against a third party in practice.

Sheppard Mullin will be watching developments in the AUCL space in the coming months, so stay tuned.

In the meantime, see here for the Draft Amendment in Chinese, and here for a courtesy translation.

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